Several factors are depressing oil prices. OPEC's market power has been weakened by the rise of shale oil production in the US. The transition towards a less commodity-based growth path in China and Iran's return to the oil market are also playing a role. An illustrative calculation in DELFI, DNB's macroeconomic model, shows that lower oil prices are having a modestly positive effect on the Dutch economy. A permanent USD 25 per barrel price drop (some 50% relative to the baseline projection) would lift GDP volume yearly by 0.2 per cent on average in the first three years of the oil shock (see table below). The positive effect of lower oil prices is smaller than in the seventies and eighties as the energy-intensity of the Dutch economy has almost halved since then. This can be explained by the larger contribution from the services sector to national income, increased energy efficiency and reduced use of oil as a source of energy.
Effect on the Dutch economy of a USD25 drop in oil prices
Cumulated deviation from the baseline projection
in percentages/ percentage points*
|year 1||year 2||year 3|
|Private consumption (volume)||0.3||0.8||1.4|
|Business investments (volume)||0.1||1.4||2.8|
|Consumer prices (HICP)||-0.8||-1.4||-1.5|
|Private sector contract wages||-0.1||-0.6||-1.1|
|Fisical balance (% GDP)*||-0.1||-0.8||-1.3|
Lower oil prices impact the Dutch economy through several channels. First of all, they depress consumer prices through energy products such as petrol. The HICP price level ends up around 0.7 per cent per year lower in the first and second year after the oil shock. In the third year, the effect on inflation has virtually disappeared. Lower oil prices boost purchasing power and consumption. This effect is dampened slightly by the fact that wages also increase less as a result of lower inflation. The volume of private consumption will be 1.4 per cent higher after three years. In addition, business investment will grow on the back of accelerating economic activity and higher profit margins. In a small and open economy like the Netherlands, a relatively large proportion of extra consumption and investments is supplied from abroad. These higher imports curb the effect of low oil prices on Dutch GDP volume. And finally, the fiscal balance decreases as gas prices and consequently gas revenues fall in line with oil prices.
These calculations do not include a possible pick-up in world trade, resulting from increasing purchasing power in oil importing countries. In the current situation, the effect of lower oil prices on world trade is likely to be significantly smaller than during previous episodes of oil price declines. The US have in recent years become an important oil producing country. Consequently, the US economy, which often plays the role of growth engine for the global economy, is benefiting less from low oil prices. Lower investments in the shale oil industry combined with the high debt levels of various shale oil companies are dampening economic growth in the United States. Lower oil prices are also partly the result of disappointing global demand, mainly in the emerging economies. Moreover, the link between world trade and global economic growth has weakened since the crisis. To the extent that lower oil prices increase world trade, the effect on the Dutch economy would be higher than presented in the table above, through higher exports. One significant long-term risk that our analysis excludes, is that prolonged low oil prices will discourage the investments in renewable energy that are necessary to achieve the country's climate ambitions.